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Using Trusts to Protect Retirement Funds You Want to Pass To Loved Ones

One of the many benefits of holding money in retirement accounts like IRA accounts or employer sponsored retirement plans, such as 401(k)s and 403(b)s) is that these funds are generally protected from creditors, even if the account owners declare bankruptcy.

But what about if those retirement assets are part of the assets left to survivors when the retirement account owner passes away? Are they still protected from creditors if the heirs declare bankruptcy?

According toe the U.S. Supreme Court, in a case called Clark v. Rameker, the answer is a resounding “NO!”

In a nutshell, the Court found that Heidi Heffron-Clark, who inherited an IRA from her mother in 2001 and filed for bankruptcy nine years later, could not shield the account from her creditors.

Since that June 2014 decision, many financial advisers, estate attorneys and other experts have encouraged clients to create trusts and name those trusts, rather than specific individuals, as inheritors of their IRAs. Those IRAs left to irrevocable trusts will have a greater chance of being protected from the claims of the new account owners’ creditors and also from the claims of creditors of the trust beneficiaries.

Using trusts can also provide other benefits, like enabling the inheritors to use the oldest beneficiary’s life expectancy to stretch out the tax-deferred growth of the funds held in the trust. They also let you control when beneficiaries are to receive distributions and can protect the assets from future lawsuits, irresponsible spending and divorce proceedings..

As always, you should consult with legal and financial professionals regarding the specifics of your situation, but it may make a whole lot of sense to set up a trust to protect the hard-earned retirement assets that you have accumulated and want to pass on to your loved ones.